Credit Scores

Credit scores and Credit reports - what’s its all about?Lenders need to try and work out if you are likely to repay them the money they loan to you. Gone are the days of knowing your local bank manager and sitting face to face hammering out a loan over a bad cup of coffee. Nowadays most credit is applied for and approved over the internet with neither party ever meeting. Credit scoring is a relatively new process in which lenders can look at a large amount of information about you from lots of different sources, some of which may surprise you, and then use this to decide if you are a low risk ie. have a high credit score and will therefore be able to get cheaper loans easily or higher risk and therefore offered more expensive loans or no credit at all.

How your credit Score is calculatedThe Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your Score is calculated. Your score considers both positive and negative information in your credit report. Late payments will lower your Score, but establishing or re-establishing a good track record of making payments on time will raise your score.

How a Score breaks down:These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

Payment history (35%)The first thing any lender wants to know is whether you've paid past credit accounts on time. This is one of the most important factors in a credit score.

A few late payments are not an automatic "score-killer." An overall good credit picture can outweigh one or two instances of late credit card payments. However, having no late payments in your credit report doesn't mean you’ll get a "perfect score." Your payment history is just one piece of information used in calculating your credit score.

Credit payment history on many types of accounts, account types considered for payment history include:

Credit cards (Visa, MasterCard, American Express, etc.)

Retail accounts (credit from stores where you shop, like department store credit cards)

Installment loans (loans where you make regular payments, like car loans)

Finance company accounts

Mortgage loans

Public record and collection items like council tax and Utilities ( Electricty, Water bills)

These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.

Negative factors include:

Bankruptcies - will stay on your credit report for 7-10 years, depending on the type

Foreclosures - this means to prevent someone redeeming a mortgage if they have defaulted on payments

Lawsuits - someone has taken a civil action against you to reclaim a debt

Liens - this is the right to take and hold the property of a debtor as security or payment for debt

CCJ's - County Court Judgement - a debt has been upheld against you in the county court

Details on late or missed payments ("delinquencies") and public record and collection items

The credit score considers:

How late they were

How much was owed

How recently they occurred

How many there are

How many accounts show no late payment

A good track record on most of your credit accounts will increase your credit score.

Amounts owed (30%)Owing money on credit accounts doesn't necessarily mean you're a high-risk borrower with a low credit score. However, when a high percentage of a person's available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.

Part of the science of scoring is determining how much is too much for a given credit profile. Your credit score takes into account several factors.

The amount owed on all accountsNote that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

The amount owed on different types of accountsIn addition to the overall amount you owe, your credit score considers the amount you own on specific types of accounts, such as credit cards and installment loans.

Whether you're showing an amount owed on certain types of accountsIn some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all. For example, closing unused credit accounts that have zero balances and are in good standing will not raise your credit score.

How many accounts have balancesA larger number of accounts with amounts owed can indicate higher risk of over-extension.

How much of the total credit line is being used and other "revolving" credit accountsSomeone who is close to "maxing out" several credit cards has a high credit utilization ratio and may have trouble making payments in the future.

How much of the installment loan amounts is still owed, compared with the original loan amountFor example, if you borrowed £10,000 to buy a car and you have paid back £2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low credit score.

Length of credit history (15%)In general, a longer credit history will increase your credit score. However, even people who haven't been using credit long may have a high credit score, depending on how the rest of the credit report looks.

Your credit score takes into account:how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts

how long specific credit accounts have been established

how long it has been since you used certain accounts

Types of credit in use (10%)Your credit score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It's not necessary to have one of each, and it's not a good idea to open credit accounts you don’t intend to use.

The credit mix usually won’t be a key factor in determining your credit score—but it will be more important if your credit report does not have a lot of other information on which to base a score.

Have credit cards – but manage them responsiblyHaving credit cards and installment loans with a good payment history will raise your credit score. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.

What types of credit accounts you haveDo you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?

How many types of credit accountsYour credit score also looks at the total number of accounts you have. How many is too many will vary depending on your overall credit picture.Closing an account doesn’t make it go awayA closed account will still show up on your credit report, and its history will be considered by your credit score.

New credit (10%)Research shows that opening several credit accounts in a short period of time represents a greater risk - especially for people who don't have a long credit history. People tend to have more credit today and shop for new credit more frequently than ever. credit score reflects this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk - especially for people who don't have a long credit history. Your credit score takes into account several factors, including how you shop for credit.

Its OK to request and check your own credit reportChecking your credit report won’t affect your credit score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

How many new accounts you haveYour credit score looks at how many new accounts you have by type of account. It also may look at how many of your accounts are new accounts.

Don't open new accounts too rapidlyIf you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your credit score if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your credit score.

How many recent inquiries you haveAn inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although the credit score only consider inquiries from the last 12 months. The credit score has been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.

There are 3 important facts about inquiries to note:

Inquiries usually have a small impact

Many types of inquiries are ignored completely

The score allows for "rate shopping"

MYTH: Your credit score will drop if you apply for new credit

TRUTH: If it does, it probably won't drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.